updated 2/11/2010 4:18:27 PM ET 2010-02-11T21:18:27

You can hate the cars but still love the stock.

Lost in the flurry of headlines recently about Toyota Motor's recall over faulty gas pedals and brakes was news of a remarkable feat for an automaker these days: The Japanese company actually made a profit last quarter.

Which raises an intriguing possibility: If Toyota strings together more profitable quarters, will investors kick themselves someday for missing a chance to have bought a piece of what is still arguably a great company on the cheap?

Sean Thorpe, co-manager of foreign stock investments at Reed, Conner & Birdwell in Los Angeles, thinks so. He'll talk your ear off about his profit estimates for Toyota and where he thinks the stock, down 19 percent in three weeks, should be trading.

But the specifics of his argument, or whether he's even right, are less important than his instinct here: Buy on the bad news, not the good.

It's a tiresome platitude, but the fact is, investors frequently do the opposite, taking comfort in buying and selling along with the crowd. The history of investing, and during recalls in particular, shows this is often a mistake.

— Stock in Merck & Co. hit a nine-year low in October 2004 shortly after it withdrew its painkiller Vioxx, linked to heart attacks and strokes. Customers sued but the drug maker shrewdly decided to litigate cases separately, instead of as a class, which resulted in far lower legal bills than many feared. Investors also underestimated Merck's pipeline of future drugs. The stock has had a bumpy ride in the past five years but is up 27 percent versus a 10 percent drop in the Standard & Poor's 500 index.

— Johnson & Johnson shares plunged in the early 1980s after it pulled Tylenol from shelves amid a cyanide-lacing scare and, later, competition from newly approved over-the-counter versions of the painkiller ibuprofen. But the worries eventually blew over, and the stock tripled in the three years through April 1987.

— Intel shares fell 8 percent in eight trading days on speculation in December 1994 it would have to replace its flawed Pentium chips. The chips were spitting out wrong answers in rare cases when asked to divide into extremely large numbers. Once the recall was announced, the shares quickly retraced its losses, doubling over the next six months.

"Recalls can be a buying opportunity," says Gene Grabowski, senior vice president of crisis manager Levick Strategic Communications. "There's usually a substantial blow to the shares, but they typically climb back in five or six months."

Buying on bad news, recalls or not, has been the route to riches for many famous investors.

The late philanthropist John Templeton, for instance, made a killing scooping up slumping shares in dozens of companies in 1939, and with borrowed money no less. Warren Buffett bought stocks during the bear market of 1974. Instead of fear, he felt, as a magazine quoted him at the time, "like an oversexed guy in a harem."

Then there is Prem Watsa of Canadian insurer Fairfax Financial. He bet against the S&P 500 while everyone was buying stocks in the late 1990s before the dot-com crash. More recently, he amassed insurance contracts that paid out on corporate defaults before the credit crisis. Fairfax stock has doubled in the past five years.

Of course, there have been plenty of examples of bold investors who got it wrong. One with mud on his face recently: billionaire Joseph Lewis, who put $1 billion into Bear Stearns before it collapsed.

The question for Toyota investors: How much worse is the news going to get before it gets better?

Rebecca Lindland, an analyst at researcher IHS Global Insight, suspects a lot worse.

"This is a company used to accolades, not accusations," and may not have faced up to all the problems with its cars, she says.

Biggest auto recallsWhat's more, she thinks the hit to Toyota's reputation could hurt sales for years even if it has come completely clean already.

Lindland says the company was already on track to lose market share in the U.S. this year thanks to inroads from Hyundai and Subaru. And those losses now are likely to accelerate if crucial first-time Toyota buyers unhappy with the recalls decide to bolt from the brand.

"These buyers are not loyal, and not likely to come back," she says.

Even before the recall, Toyota was struggling. People weren't buying as many cars as they were before the recession. Adding to the company's pain: A strong yen, which cuts overseas profits when translated back into the Japanese currency.

But Thorpe, the Toyota bull, thinks the wind is at the company's back now that the economy is recovering. His bet is that recalls will be a "vague memory" in a few years. Buttressing that view, car retailer AutoNation CEO Mike Jackson said Thursday that he expects Toyota to quickly regain "most of the share that it lost" to competitors.

Thorpe's prediction: The company's U.S. shares, called American Depositary Receipts, will fetch at least $100 a piece in three to five years, up from a recent $74.60. If they rise that much in three years, investors buying now would see their money compound, before dividends, at a 10 percent annual rate.

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